Comparing PE in 2006 and 2014: How useful is aggregate data?

It’s pretty common in private equity to analyze market data on a year-to-year basis. Once the calendar flips to January 1, we tally the industry’s annual total and compare it to prior years, under the guise that we can decipher where the industry is and where it’s going using headline numbers.

Strong headline numbers in 2014 and 2013 harken back to the “boom” days of 2005-2007. Last year actually beat out the most active pre-crisis year in terms of U.S. deal counts. But few would argue that today’s PE market is more overheated than 2007’s, which saw nearly $1 trillion in total investments compared to almost half that last year. That’s an easy distinction to make. Let’s take 2006 and 2014, instead, which had relatively small differences in total capital invested (about 5%). If 2014 was as strong as 2006, does that mean we could be looking at a record-breaking 2015?

Few would say that we are, because things are “different” today. But you wouldn’t automatically conclude that looking solely at yearly totals, as many end up doing. The bits and pieces of the data are much more illuminating than the whole.

2014 value was made up of fewer blockbuster deals and more middle-market activity, more add-ons, more minority deals and more secondary buyouts compared to 2006. These aren’t new insights by any means, but they can get overlooked if the focus is on aggregate totals.

The numbers on the fundraising side are also misleading. Fund counts (+2%) and total capital raised (+3%) were minimally higher in 2014 versus 2006, but there were some tectonic shifts that occurred within those seven years. One big change was the size of growth-focused funds, which grew by 81% on average. Buyout and mezzanine funds both deflated in size over time, in a big way for mezzanine (-46%). And even though both fund counts and total capital raised were pretty level, the percentage of PE funds to raise their target amounts rose from 67% in 2006 to 88% last year, quite an improvement. That’s largely because PE firms weren’t as ambitious in 2014 as they were almost a decade ago, when 82% of fund targets were bigger than their predecessor funds by a median step-up of 57%. Last year’s step-up was a much more modest 41%.